Tuesday, September 17, 2013

Charles Evans got his inflation wish. Taper is on.

As discussed earlier (see post), the Chicago Fed President Charles Evans and other senior Fed officials have been looking for indications that the unusually low PCE inflation rate (see post) is in fact temporary. The Fed is concerned about "turning Japanese" - a deflationary environment that is extremely difficult to correct.

It seems that Charles Evans got his wish. The Fed is just as focused on inflation expectations as on the actual inflation measures that tend to be "backward looking". And according to the Fed's own measure of inflation expectations (breakeven measure adjusted for "risk premium"), inflation expectations have risen. The August numbers were released today.

Source: Cleveland Fed

In fact the increase has been across the curve, with the near-term expectations rising the most.

Source: Cleveland Fed

This means that the last potential obstacle to the tapering of the Fed's securities purchases has been removed. The FOMC members can sleep well at night knowing that they are not causing deflation (for now) by taking this action.

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